Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector.
BREXIT
Please see the product sections for updates on the various draft SIs published in the last two weeks in anticipation of a hard Brexit.
FMLC letter on clause 1 of Financial Services (Implementation of Legislation) Bill
On 3 January, the FMLC published a letter to HMT highlighting two issues of legal uncertainty relating to clause 1 of the Financial Services (Implementation of Legislation) Bill which received its first reading in the House of Lords in November 2018. The Bill provides the government with power to implement and make changes to "in-flight" financial services legislation for two years after the UK withdraws from the EU in a no-deal scenario. The in-flight legislation listed in the Bill does not take into account EU level 2 legislation that does not come into effect before exit day. This means that it will not be retained under the European Union (Withdrawal) Act 2018. Although the regulators have powers under the Financial Regulators' Powers (Technical Standards etc) (Amendment etc) (EU Exit) Regulations 2018 to deal with this, the FMLC has concerns about oversight and predictability. In particular, although the regulators are required to hold consultations ahead of issuing BTS, the only oversight of the new exit instruments would come from HMT. In addition, the FMLC questions the exercise of the regulators' powers in respect of EU measures incorporating standards that have already been subject to the European legislative process pre-exit day. Market participants have prepared to comply with such technical standards as have been agreed ahead of exit day. The FMLC encourages HMT to ensure continuity of the regulatory regime by including in-flight technical standards within clause 1 of the Bill. A second uncertainty arises because the list in clause 1 of the Bill limits the scope of HMT's power to make regulations to implement in-flight legislation to only those identified within it. The FMLC understands that the list comprises only pieces of in-flight legislation that would fall under the control of HMT. However, this means pieces of in-flight legislation that are not specific to financial services, but which still impose obligations and requirements on financial markets participants, will not be implemented by this means post-Brexit.
CONSUMER/RETAIL
FCA statement about CMCs registering for temporary permission
On 2 January, the FCA announced that CMCs can now register for the temporary permission they will need to continue operating when the FCA takes over regulation. From April, all CMCs set up or serving customers in England, Scotland and Wales will need to be authorised by the FCA to continue operating. CMCs have until the end of March to register for temporary permission. This will allow CMCs to continue operating legally until they are fully FCA-authorised. Once registered for temporary permission, CMCs will need to submit their application for authorisation during one of two application periods (between April and the end of July). The FCA published a policy statement setting out its final rules and guidance on the regulation of CMCs in December 2018.
FINANCIAL CRIME
Council of EU Decision incorporating MLD4 and WTR into EEA Agreement published in OJ
On 27 December 2018, Council Decision (EU) 2018/2059 on the position to be adopted within the EEA Joint Committee amending Annex IX (Financial Services) to the EEA Agreement was published in the OJ. The Decision states that the following are to be incorporated into the EEA Agreement: (i) the revised WTR; (ii) MLD4; and (iii) Commission Delegated Regulation (EU) 2016/1675, which supplements MLD4. The Decision entered into force on 29 November 2018. The EC adopted a proposal for the Council's Decision on 12 October 2018.
INSURANCE
EIOPA opinion on supervision of non-life cross-border insurance business of a long-term nature
On 21 December 2018, EIOPA published an opinion on non-life cross-border insurance business of a long-term nature and its supervision. The opinion is addressed to NCAs to ensure appropriate application of legal requirements and consistent supervisory practises. It outlines EIOPA's expectations on the calculation of technical provisions and on the governance of cross-border business. It is intended to supplement EIOPA's guidelines on the valuation of technical provisions which it published in December 2014 under the Solvency II Directive. EIOPA points out that long-term non-life insurance business operated cross-border is typically more uncertain than the majority of non-life business, and requires knowledge of the local market specificities and the actuarial skills for the calculation of the technical provisions and the management of the activity. However, EIOPA has identified deficiencies relating to the calculation and supervisory assessment of the solvency position of undertakings carrying out such business, which it believes could lead to localised under-pricing and under-reserving to the detriment of policyholders. EIOPA does not intend to add requirements on long-term cross-border business, but to highlight the complexity of these activities and the need for all parties involved to be aware of the local specificities when cross-border business is carried out. Accordingly, the opinion sets out EIOPA's expectations to undertakings and recommendations to NCAs in three areas: (i) expectations on technical provisions with a focus on the best estimate calculation; (ii) expectations on the key functions and the AMSB; and (iii) recommendations on the SRP and the collaboration between home and host member state NCAs.
MARKETS AND MARKETS INFRASTRUCTURE
FCA Handbook instruments implementing Securitisation Regulation
On 3 January, the FCA published: (i) Securitisation Regulation Implementation (Fees for Third Party Verifiers) Instrument 2019; and (ii) Enforcement (EU Securitisation Regulation) Instrument 2019. The instruments are in light of the entry into force of the Financial Services and Markets Act 2000 (Securitisation) Regulations 2018 and come into force on 3 January.
ESMA binary options product intervention decision published in OJ
On 27 December 2018, ESMA Decision (EU) 2018/2064 was published in the OJ. The Decision relates to the renewal of the prohibition of the marketing, distribution or sale of binary options to retail clients and renews ESMA Decision (EU) 2018/1466, which was published in October 2018. ESMA published its Decision on 21 December 2018 and the Decision entered into force on 28 December 2018. It applies from 2 January until 1 April.
ESMA amends guidelines on commodity derivatives definitions under MiFID II
On 21 December 2018, ESMA published amended guidelines on the application of C6 and C7 of Annex I of MiFID II. ESMA originally adopted guidelines on definitions of commodity derivatives and their classification in 2015. The amended guidelines update the original guidelines to adapt them to the MiFID II regulatory framework. The guidelines clarify that Article 4(1)(2) of MiFID II should be read in conjunction with points 6 and 7 of Annex I to MiFID II and Article 7 of Delegated Regulation (EU) 2017/565 supplementing MiFID II as regards organisational requirements and operating conditions. The guidelines will start to apply two months after the date of their publication on ESMA's website in all EU official languages. Publication of the translations in all official languages of the EU will therefore trigger a two-month period during which NCAs must notify ESMA whether they comply or intend to comply with the guidelines. NCAs that do not intend to comply must notify ESMA of their reasons for not complying with the guidelines.
Working Group on Sterling Risk-Free Reference Rates paper on loans referencing LIBOR
On 21 December 2018, the Working Group on Sterling Risk-Free Reference Rates published a paper setting out potential considerations for loan market participants, in relation to new and legacy loan transactions that reference LIBOR. The paper aims to help market participants prepare in advance of 2021, when LIBOR may cease to be available. The paper highlights possible issues that could arise if LIBOR is replaced, such as the impact on loan agreements and hedging arrangements, the possibility that LIBOR might continue to be published (but be based on a different methodology) and the impact that a LIBOR replacement could have on the regulatory obligations of market participants. The paper goes on to suggest steps that can be taken to mitigate these issues, including: (i) referencing alternative benchmarks; (ii) increasing transparency (for example, by adding disclaimers and raising awareness with counterparties); (iii) including alternative fallbacks in documents, specifically to address the discontinuation of LIBOR; (iv) amending terms of loans to make future amendments easier; and (v) considering the wider impact, where a loan is part of a larger transaction.
UK statement on EU position on proposed Regulation amending EMIR supervisory regime for EU and third-country CCPs
On 21 December 2018, the Council of the EU published a summary record of a meeting of COREPER on 3 December 2018. The record sets out a statement by the UK government on the proposed Regulation amending EMIR as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs. The UK government outlined the reasons it did not support a General Approach on the EMIR CCP proposal. The UK expressed its objection to article 25(7)(f), which requires third-country regulators to agree procedures to "assure" the enforcement of ESMA's decisions as part of a memorandum of understanding. The statement explains that this would mean that ESMA's decisions would be binding on third-country supervisors, and ESMA could require a supervisor to enforce a decision that may conflict with its own domestic requirements and could increase financial stability risks in a stress scenario. The UK described the provision as unnecessary and unworkable in the context of cross border supervisory and regulatory co-operation for internationally active CCPs. The statement also described the proposal as unbalanced in the significant powers it gives ESMA and the ECB over non-EU CCPs when they are not given the same powers over EU CCPs. This means ESMA could potentially have powers to "dual supervise" all significant CCPs worldwide except those inside the EU. The UK suggested that article 25(7)(f) should be amended to include the word "appropriately" so that the co-operative arrangements between ESMA and third-country authorities specify "the procedures for third country authorities to appropriately assure the effective enforcement of decisions adopted by ESMA". This would reflect the intention of the co-legislators to give ESMA the tools and flexibility it needs to sign workable memoranda of understanding with third-country supervisors. At the meeting, COREPER agreed its position on the EMIR CCP proposal and confirmed that the Council and the Parliament are now able to begin trialogue negotiations.
Draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 published by HMT
On 21 December 2018, HMT published a draft version of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. The purpose of the Regulations is to amend FSMA to ensure that it continues to operate effectively in the UK once the UK has left the EU. Among other things, the Regulations make amendments to the following Parts of FSMA: (i) regulated and prohibited activities (Part 2); (ii) permission to carry on regulated activities (Part 4A); (iii) performance of regulated activities (Part 5); (iv) control of business transfers (Part 7); (v) control over authorised persons (Part 12); and (vi) provision of financial services by members of the professions (Part 20). The Regulations also amend statutory instruments made under or relating to FSMA, including the RAO and the FPO. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. The Regulations will enter into force on exit day, with the exception of certain provisions specified in regulation 1(2) that will come into force on the day after the day on which the Regulations are made.
PAYMENT SERVICES AND PAYMENT SYSTEMS
Financial Service Contracts (Transitional and Saving Provision) (EU Exit) (No 2) Regulations 2019 published by HMT
On 21 December 2018, HMT published a draft version of the Financial Service Contracts (Transitional and Saving Provision) (EU Exit) (No 2) Regulations. The purpose of the Regulations is to establish a run-off regime for EEA authorised e-money and payments firms that currently operate in the UK on the basis of EU legislation. The Regulations allow these firms to run off pre-existing contractual obligations in the UK but not to undertake new business. The Regulations amend the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018, which established the TPR for e-money and payments firms. Like firms in the scope of the FSCR established by the FSC Regulations, e-money and payments firms will be permitted to continue to carry out new business to the extent necessary to run off pre-existing contractual obligations in the UK, but not to undertake new business. Firms will able to use the run-off regime for up to five years after they enter it. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. It intends to lay the Regulations before Parliament before exit day. The Regulations will come into force on the day after the day on which they are made.
PRUDENTIAL REGULATION
COREPER invited to approve proposal for regulation in relation to minimum loss coverage for NPEs
On 3 January, the Council published confirmation of the final compromise text with a view to agreement regarding the proposal for a regulation of the EP and of the Council amending Regulation (EU) No 575/2013 in relation to minimum loss coverage for NPEs. Provisional agreement on the regulation was reached on 18 December 2018. The note states that the proposals have been examined by the working party on financial services. COREPER is invited to approve the text of the proposal for the regulation with a view to reaching an agreement at first reading with the EP.
Draft Financial Conglomerates and Other Financial Groups (Amendments etc) (EU Exit) Regulations 2019 published by HMT
On 21 December 2018, HMT published a draft version of the Financial Conglomerates and Other Financial Groups (Amendments etc) (EU Exit) Regulations 2019. The purpose of the Regulations is to make amendments to correct deficiencies in legislation implementing FICOD to ensure that the regulatory regime for financial conglomerates operates effectively after Brexit. The Regulations make extensive amendments to the FICOR Regulations, as well as consequential amendments to the CRR. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. It intends to lay the Regulations before Parliament before exit day. The Regulations will enter into force on exit day.
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